Trade and Integration Flashcards
WTO
- an international body responsible for negotiating trade agreements and ‘policing’ the rules of trade to which its members sign up.
- Trade disputes between members are settled by the WTO.
Absolute advantage
where one country is able to produce more of a good or service with the same amount of resources, such that the unit cost of production is lower.
Reciprocal absolute advantage
Where, in a theoretical world of two countries and two products, each country has an absolute advantage in one of the two products.
Comparative advantage
Where one country produces a good or service at a lower relative opportunity cost than others.
Relative opportunity cost
The cost of production of one good or service, in terms of the sacrificed output of another good or service in one country relative to another.
Terms of trade
The price of a country’s exports relative to the price of its imports.
Terms of trade = [Index of average export prices] / [index of average import prices] x 100%
Trading possibility curve (TPC)
A representation of all the combinations of two products that a country can consume if it engages in international trade.
The TPC lies outside the production possibility curve (PPC) showing the gains in consumption possible from international trade.
Factor endowments
The mix of land, labour and capital that a country posses.
Factor endowments can be determined by, among other things, geography, historical legacy, and economic and social development.
Factor intensities
The balance between land, labour and capital required in the production of a good or service.
Labour-intensive production
Any production process that involves a large amount of labour relative to other factors of production.
Capital-intensive production
Where the production of a good or service requires a large amount of capital relative to other factors of production.
Heckscher-Ohlin theory of international trade
A theory that a country will export products produced using factors of production that are abundant, and import products whose production requires the use of scarce factors.
Infant industries
Industries in an economy that are relatively new and lack the economies of scale that would allow them to compete in international markets against more established competitors in other countries.
Profit margin
the difference between a firm’s revenue and costs, expressed as a percentage of revenue.
Dynamic efficiencies
- efficiencies that occur over time.
- International trade can lead to changes in behaviour over a period of time that can increase productive and allocative efficiency.
Knowledge and technology transfer
the process by which knowledge and technology developed in one country is transferred to another, often through licensing and franchising.
Licensing arrangements
an agreement that ideas and technology ‘owned’ by one company can be used by another, often for a charge.
Regional trading bloc
- Countries in a region that have formed an ‘economic club’ based on abolishing tariffs and non-tariff barriers to trade.
e. g. the EU, NAFTA, ASEAN
Primary commodities
goods produced in the primary sector of the economy, such as coffee and tin.
Prebisch-Singer hypothesis
- The argument that countries exporting primary commodities will face decreasing terms of trade in the long run,
- leading them to have to export more and more in order to ‘pay for’ the same volume of imports of secondary sector goods / capital goods,
- which traps them in a low level of development.
Developed economies
Countries with a
1. High income per capita
2. Diversified industrial and tertiary sectors of the economy.
Examples: USA, UK, Japan and South Korea.
Developing economies
Countries with
- Relatively low income per capita
- Industrial sector is small / undeveloped
- Primary sector production is a relatively large part of total GDP.
Liberalisation (international trade context)
Reductions in the barriers to international trade, in order to allow foreign firms to gain access to the market for goods and services that are traded internationally.
Transition economies
Economies in the process of changing from central planning to the free market.
Intra-regional trade
Trade between countries in the same geographical area, for example, trade between UK and Germany, or the US and Canada.
Inter-industry trade
Trade involving the exchange of goods and services produced by different industries.
Intra-industry trade
Trade involving the exchange of goods and services produced by the same industry.
Freely floating exchange rate
a system whereby the price of one currency expressed in terms of another is determined by the forces of demand and supply.
Fixed exchange rate
an exchange rate system in which the value of one currency has a fixed value against other countries.
This fixed rate is often set by the government.
Semi-fixed/semi-floating exchange rate.
an exchange rate system that allows a currency’s value to fluctuate within a permitted band of fluctuation.
Foreign Exchange (FOREX) Market
a term used to describe the coming together of buyers and sellers of currencies
Short term capital flows (§11)
- flows of money in and out of a country in the form of bank deposits.
- Short-term capital flows are highly volatile and exist to take advantage of changes in relative interest rates.
Long-term capital transactions (§11)
Flows of money related to buying and selling of assets, such as land or property of production facilities (direct investment) or shares in companies (portfolio investment).
External economic shocks
Unexpected events coming from outside the economy that cause unpredicted changes in AS or AD.
Examples: rapid rises in oil prices, global slowdown.
Purchasing power parity (PPP)
- The exchange rate that equalises the price of a basket of identical traded goods and services in two different countries.
- PPP is an attempt to measure the true value of a currency in terms of the goods and services it will buy.
J-curve effect
- Shows the trend in a country’s balance of trade, following a depreciation of the exchange rate.
- Fall in ER causes initial worsening of balance of trade, as higher import prices raise value of imports, and lower export reduce the value of export, due to SR price inelasticity of the demand for imports and exports.
- Eventually the trade balance improves.
- An appreciation of the currency causes an inverted J curve effect.
Marshall Lerner Condition
For a depreciation of the currency to improve the balance of trade, the sum of the price elasticities of demand (PEDs) for imports and exports must be greater than 1.
Hedging
Business strategy that limits the risk that losses are made from changes in the price of currencies or commodities
Futures markets
Markets where people and businesses and buy and sell contracts to buy commodities or currencies at a fixed price at a fixed date in the future.
Foreign currency reserves
Foreign currencies held by central banks in order to enable intervention in the FOREX markets to affect the country’s exchange rate.
Bilateral Exchange Rate
The exchange of one currency against another
Effective exchange rate
The exchange rate of one currency against a basket of other countries, often weighted according to the amount of trade done with each country.
Single Currency
A currency that is shared by more than one country.
e.g. the euro is shared by 15 countries in the EU.
Euro area, Eurozone
Term to describe the combined economies of the countries using the euro.
Expenditure Switching Policies
Policies that increase the price of imports and/or reduce the price of exports, in order to reduce the demand for imports, and raise the demand for exports, to correct a current account deficit on the balance of payments.
Expenditure reducing policies
Policies that reduce the overall level of national income in order to reduce the demand for imports and correct a current account deficit on the balance of payments.
Economic integration
Refers to the process of reducing the boundaries that separate economic activity in one nation state from that in another.
Non tariff barriers (NTBs)
Protectionist measures that restrict trade other than tariffs.
Trade deflection
Where one country in a free trade area imposes tariffs on another to reduce imports, but the imports come in from elsewhere in the free trade area.
Free trade area
an agreement between two or more countries to abolish tariffs on trade between them.
Customs union
An agreement between two or more countries to abolish tariffs on trade between them and to place a common external tariff on trade with non-members.
Single market
depends economic integration from a customs union by eliminating non-tariff barriers to trade, promoting the free movement of labour and capital, and agreeing common policies in a number of areas.
Economic union
Deepens the integration in a single market, centralising economic policy at the macroeconomic level.
Monetary union
the deepest form of integration, in which countries share the same currency and have a common monetary policy as a result.
Single European Market (SEM)
A process adopted in the EU that promoted the free movement of goods, services and capital by harmonising product standards and removing remaining non-tariff barriers to trade.
Monetary policy sovereignty
the ability of a country to pursue an independent monetary policy.
Trade creation
Where economic integration results in high-cost domestic production being replaced by imports from a more efficient source within the economically integrated area.
Trade diversion
where economic integration results in trade switching from a low-cost supplier outside the economically integrated area to a less efficient source within the area.
Transaction costs
the costs of trading, which includes costs of changing currencies
Price transparency
the ability to compare prices of goods and services in different countries.
Stability and Growth Pact (§11)
limits agreed to public sector borrowing and the national debt for those EU countries that are part of the euro area.
Automatic stabilisers (§11)
Elements of fiscal policy, that cushion the impact of the business cycle without any need or corrective action by the government.
- For example, higher spending on unemployment benefits and welfare payments and lower taxation receipts provide an automatic fiscal stimulus in times of economic slowdown.
Fiscal transfers
occur where taxation raise in one country is used to fund government expenditures in another country.
Economic convergence
the process by which economic conditions in different countries become similar.
- Distinguish between monetary convergence and real convergence.
- Membership of the euro area only requires monetary convergence to have taken place.
Monetary convergence
A type of economic convergence involving similarities in inflation and interest rates.
Real convergence
A type of economic convergence involving similarities in the structures of economies.
Optimal currency area
- Refers to conditions that need to be met to avoid the costs of monetary union:
1. A high degree of labour market flexibility
2. Mechanisms for fiscal transfers
3. Absence of external shocks that impact differently on different economies (asymmetric shocks).
Asymmetric shocks
External shocks that impact differently on different economies in an economically integrated area.
